How Third-Party NDAs Impact M&A Deals

When companies share sensitive information during mergers and acquisitions (M&A), protecting confidentiality is critical. Third-party Non-Disclosure Agreements (NDAs) ensure that not just buyers and sellers, but also their advisors - like attorneys, accountants, and consultants - handle this information responsibly. Without these safeguards, data leaks can lead to lost deals, competitive risks, or even legal issues. Here's what you need to know:

• Third-party risks: Advisors might misuse or mishandle sensitive data, intentionally or not.
• Key protections: NDAs define who can access information, enforce confidentiality, and hold parties accountable for breaches.
• Practical tools: Staged disclosure, secure deal rooms, and clean teams help control access to sensitive data.

Understanding Confidentiality and Non Disclosure Agreements in M&A

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Risks of Sharing Information with Third Parties

Why M&A Deals Require Third-Party Involvement

Mergers and acquisitions (M&A) are complex processes that rely heavily on third-party expertise. Buyers typically engage attorneys to review legal documents, accountants to analyze financial data, lenders to provide acquisition financing options, and consultants to assess operational risks. On the other side, sellers enlist advisors to prepare the business for sale and negotiate terms. This network of professionals is crucial for thorough due diligence and informed decision-making.

But with every additional advisor, the risk of exposure grows. While the primary parties in a transaction have clear incentives to maintain confidentiality, third-party advisors may not always follow the same stringent security measures. This interconnected web of participants highlights the importance of robust confidentiality controls during the due diligence phase.

Confidentiality Risks and Their Consequences

One immediate risk is talent poaching. If a buyer gains access to detailed employee data - such as names and compensation information - and the deal falls through, that data could be misused to recruit key employees away from the seller. Even more concerning are competitive intelligence leaks. When confidential data, like pricing strategies or supplier agreements, ends up in the hands of competitors through loosely defined "financial advisors" or "investors", it can lead to serious consequences. Such leaks not only jeopardize the deal but also expose companies to potential antitrust violations, which carry both civil and criminal penalties.

Attorney Taylor Gaver from BoyarMiller emphasizes the role of NDAs in managing these risks:

"An NDA protects a discloser of proprietary information from a recipient using such proprietary information for improper purposes, such as soliciting employees or interfering with customer or supplier relationships."

Another modern challenge comes from unsecured AI tools. Bill Rosin and David Craan from Dickinson Wright PLLC caution:

"The use of these unsecured AI tools can jeopardize trade secret protection and may inadvertently violate an NDA by impermissibly using confidential information for AI training or sharing it with unpermitted third parties, even if the breach is never realized."

The numbers are equally alarming. Studies show that 29% of data breaches occur due to third-party cyberattacks, while 68% result from human errors or social engineering. For businesses navigating M&A transactions, 70% report major disruptions when a data breach occurs during the process.

Examples of Third-Party Confidentiality Breaches

Proving indirect breaches can be incredibly challenging. Montague Law explains:

"Once info is spilled, you can't just 'put it back' into confidentiality. Damages can be hard to calculate if your competitor leverages secrets, and it's tough to prove an indirect breach."

For instance, imagine a seller sharing customer lists and pricing models with a buyer's financial advisor, only to later discover that the advisor also works with a competitor. Even if the NDA mandates data destruction, the advisor might retain knowledge that influences their work with the competitor. This residual knowledge makes it nearly impossible to track or prove misuse.

Another frequent issue arises during due diligence workflows. Third-party advisors often upload sensitive financial data to platforms with inadequate security measures. This creates vulnerabilities, allowing unauthorized access or retention of the information by service providers.

The fallout from such breaches can be severe. Trust is often irreparably damaged, leading parties to terminate deals early to avoid further risks. Additionally, leaked information about a potential sale can create instability. Employees may become anxious and leave, while customers and suppliers might rethink their relationships, ultimately lowering the company's value before the deal is finalized.

These examples highlight the critical role of carefully structured NDAs in safeguarding confidentiality throughout the M&A process.

Core Elements of Third-Party NDAs

Specifying Which Third Parties Can Access Information

A strong NDA begins by clearly defining who qualifies as a "Representative" - those third parties permitted to access confidential information. This typically includes affiliates, partners, employees, agents, consultants, attorneys, accountants, and financing sources. However, simply listing these groups isn't enough. The agreement must also enforce a "need to know" restriction, ensuring only those advisors who genuinely require the information for evaluating the transaction gain access.

This level of precision is essential because buyers often want broad access for their teams, while sellers push for tighter control. Without clear definitions, a buyer could share sensitive data with a "consultant" who might also be working with a competitor. To prevent this, the NDA should include a permitted use clause, limiting the use of confidential information strictly to evaluating the M&A deal. This ensures that advisors cannot leverage the data for unrelated clients or projects.

Making Third Parties Legally Bound to Confidentiality

Defining access is one part of the equation; enforcing confidentiality is the other. Buyers should be required to bind their representatives to written confidentiality obligations that match the primary NDA's restrictions. For advisors with higher risks - like those with potential conflicts of interest - sellers can demand joinder agreements, which are separate confidentiality contracts or formal addendums that create direct legal accountability.

The NDA should also outline a standard of care, ranging from "reasonable efforts" to "strictly confidential." Many agreements require recipients to handle the information with the same diligence they apply to their own sensitive material. Additionally, a return or destruction clause mandates that third parties destroy or erase all confidential data if the deal falls through. This often includes providing written certification of compliance. Recognizing that automated IT backups make total destruction tough, NDAs typically allow exceptions for backup systems - provided those files remain subject to confidentiality terms.

Assigning Liability for Third-Party Breaches

When a third party breaches confidentiality, the agreement must clarify who is responsible. In most M&A deals, the buyer is held fully accountable for any breach caused by its representatives. Kristin Kreuder from Outside GC LLC explains:

"Sellers will seek to hold a buyer responsible for breach of the NDA by any of its representatives."

This simplifies enforcement, allowing sellers to pursue legal action against the buyer rather than chasing down individual advisors. Buyers may attempt to limit their liability by requiring representatives to sign separate NDAs, but sellers typically push back against this approach.

To strengthen enforcement, NDAs often include provisions for injunctive relief and specific performance, enabling sellers to halt a breach through a court order without needing to prove monetary damages. Securities attorney Destiny Aigbe highlights the importance of this:

"Monetary damages are often extremely difficult for a plaintiff to prove as a result of a breach of a confidentiality agreement. Consequently, a discloser's best opportunity for recourse may be to seek injunctive or equitable relief."

Some NDAs also feature a "prevailing party" clause, requiring the losing party in a breach lawsuit to cover the winner's legal fees and court costs. This provision discourages frivolous lawsuits and ensures that the financial burden falls on the party at fault. By addressing these liabilities, NDAs help balance the interests of both buyers and sellers.

Addressing Buyer and Seller Priorities in NDAs

Buyers' Need for Full Advisor Access

Buyers rely on a team of experts - attorneys, accountants, financial advisors, lenders, investors, and specialized consultants - to evaluate deals thoroughly. These professionals help assess value, spot potential liabilities, and structure financing appropriately. Without this input, buyers risk making poorly informed decisions. However, sellers often hesitate to share sensitive information freely, leading to a natural tension during negotiations.

To strike a balance, M&A NDAs typically define "representatives" broadly to include all necessary advisors. But there's a catch: the "need to know" standard ensures that only those who genuinely require access to evaluate the deal receive the information. Bill Rosin and David Craan from Dickinson Wright explain:

"In M&A NDAs, representatives of the parties... may need to access confidential information during the due diligence process. The NDA will typically allow disclosure to representatives that have a legitimate use of confidential information and require that the recipient ensure confidential treatment by its representatives".

This method provides buyers with the flexibility they need while keeping sensitive data secure. By clearly defining access, NDAs help maintain trust and protect the integrity of the transaction.

Sellers' Need to Control Information Flow

Sellers, on the other hand, have different priorities. They’re sharing highly sensitive data - like customer lists, financial records, trade secrets, and operational details - with potential buyers who might walk away or even turn out to be competitors. Kristin Kreuder from Outside GC LLC highlights this concern:

"Sellers will attempt to limit who is permitted to receive their proprietary information in order to keep it out of the hands of their competitors".

To address this, sellers often include qualifying language in NDAs to narrow the definition of "representatives." Instead of allowing disclosure to just any "consultant", they might specify "institutional advisors" or "institutional investors" to prevent data from being shared with a wide, undefined group that could pose conflicts of interest.

Sellers also implement additional safeguards to maintain control. For example:

• A "cone of silence" may be used, requiring all buyer communications and requests to go through a single designated individual or advisor. This ensures sellers can monitor who is accessing what information.
• For deals involving direct competitors, sellers might insist on clean team agreements. These agreements limit access to highly sensitive data to a small group of advisors who are not involved in the buyer's day-to-day competitive operations.

These strategies help sellers protect their proprietary information while still moving the deal forward.

Approval Processes That Prevent Deal Delays

Balancing buyers' need for access with sellers' need for control requires practical approval processes. Without thoughtful mechanisms, this tension can slow down or even derail a deal. The solution lies in creating a system that keeps the seller protected without causing unnecessary delays. Utilizing a business sale preparation planner can help organize these requirements early.

One effective approach is to replace "prior written consent" requirements with "written notice" for certain third parties. In this case, the buyer informs the seller about who will receive the information but doesn’t need to wait for explicit approval. This keeps the seller informed while allowing the deal to progress more efficiently. Another option is to pre-authorize disclosure for standard advisor categories - like legal counsel, accountants, and financing sources - directly in the NDA, eliminating the need for case-by-case approvals.

Modern deals also leverage technology through Virtual Data Rooms (VDRs) with automated NDA verification. These platforms require users to electronically accept NDA terms before accessing documents, creating a legally binding agreement without the hassle of manual paperwork. This automation ensures every third party is covered while removing administrative bottlenecks. Additionally, buyers often agree to take full responsibility for any breaches caused by their representatives. This reduces the seller's burden of vetting every individual advisor, as they can pursue legal action directly against the buyer if needed.

Here’s how different approval mechanisms compare:

Approval Mechanism	Impact on Speed	Level of Seller Control
Prior Written Consent	High Delay: Requires manual review for every new advisor	Maximum: Seller vets every individual
Notice-Only	Low Delay: Buyer informs seller but does not wait for response	Medium: Seller knows who has info but cannot easily block it
Pre-defined Permitted Recipients	No Delay: Access granted automatically to specific categories	Low: Seller relies on buyer's internal vetting
VDR NDA Verification	No Delay: Automated "click-to-accept" upon login	High: Ensures every user is legally bound before access

These strategies allow buyers and sellers to find common ground, ensuring smooth progress while respecting both parties' priorities.

Reducing Risk Through Controlled Information Release

Staged Disclosure and Multi-Phase NDAs

When it comes to sharing sensitive information during a deal, timing is everything. Sellers don’t have to reveal all their cards at once. Instead, staged disclosure allows them to release information gradually, depending on how far along the deal is and the level of trust established. Early in the process, buyers might only receive high-level summaries - like financial overviews or operational snapshots - just enough to gauge their interest. As negotiations progress and trust builds, sellers can share more sensitive details, such as customer lists, proprietary methods, or in-depth financial records.

This phased approach provides a safety net. If negotiations fall through, sellers have protected their most valuable secrets. By holding off on sharing critical information until later stages, they reduce the risk of competitors gaining access to key insights. To formalize this process, sellers often use multi-phase NDAs. These agreements clearly define what can be shared at each stage - whether it’s during initial discussions, after a letter of intent, or in the final due diligence phase.

Shaziah Singh, a partner at Nixon Peabody LLP, highlights why this is so crucial:

"Signing an NDA ensures that sensitive information about the target's business remains confidential. This includes details about employees, financials, key customer and supplier relationships, intellectual property, and other proprietary data".

By combining staged disclosure with multi-phase NDAs, sellers can strike a balance: buyers get the information they need, while critical data stays protected. To strengthen this approach, secure technology plays a key role.

Controlling Access Through Secure Data Rooms

Virtual Data Rooms (VDRs) have become a cornerstone for secure information sharing in M&A transactions. These platforms allow sellers to control access on a granular level, offering up to eight different permission levels based on user roles. For highly sensitive files, sellers can enforce additional restrictions, such as disabling downloads, enabling view-only access, or applying dynamic watermarks that display the viewer’s name and IP address.

Beyond access control, VDRs track every action in real time, providing a detailed audit trail. Users are often required to accept NDA terms before logging in, and advanced Information Rights Management (IRM) features let administrators revoke file access even after documents have been downloaded.

For deals involving competitors, sellers often create a "clean room" within the VDR. This restricted area houses the most sensitive information and is accessible only to a select group of independent advisors - known as the "clean team" - who have no operational ties to the buyer's business. These measures ensure that even as disclosure progresses, unauthorized access remains tightly controlled.

Using Clean Teams for Sensitive Competitive Information

When buyers are direct competitors, additional precautions are necessary to safeguard sensitive data. This is where clean teams come into play. These teams consist of independent advisors - such as accountants, attorneys, or financial consultants - who are granted access to the most sensitive information while being completely separate from the buyer’s day-to-day operations.

To ensure confidentiality, clean team members sign a specialized NDA, often called a Clean Team NDA. This agreement explicitly prohibits them from sharing raw data with the buyer’s broader personnel. Shaziah Singh explains the importance of this setup:

"The Clean Team NDA limits access to the information in the clean room to the receiving party's clean team members... and specifically prohibits the receiving party's clean team from disclosing the confidential information to any other party".

If the buyer’s management needs insights from the clean room, the clean team prepares a summary. This summary, reviewed by antitrust counsel, provides the necessary conclusions without exposing the underlying data. To avoid delays, sellers should involve legal counsel early to decide if a clean room is required and establish clear protocols before due diligence begins. This preparation is a key part of a comprehensive business acquisition checklist to ensure all legal and financial risks are mitigated. Technical controls, like disabling downloads and adding watermarks, further protect the information, ensuring that even if the deal doesn’t close, the seller’s competitive edge remains intact.

Conclusion

Third-party NDAs play a central role in M&A deals, shielding vital assets while granting buyers the access they need for due diligence. Incorporating key NDA provisions ensures sensitive information stays protected and decisions are made with confidence.

Be explicit about access. Clearly define which third parties can view confidential data and hold them accountable for any breaches. This clarity helps prevent information from being mishandled or improperly shared.

Use a phased disclosure strategy and secure Virtual Data Rooms with role-based permissions and audit trails. For situations involving competitors, deploy clean teams to manage sensitive, competitive data. These tactics strengthen confidentiality while allowing due diligence to proceed smoothly.

Simplify approval workflows to strike a balance between control and accessibility. Include exceptions for financing disclosures and adopt mutual NDAs to ensure reciprocal protection. A carefully crafted NDA supports comprehensive due diligence while safeguarding competitive interests, no matter how the deal unfolds.

FAQs

When should third parties sign a joinder agreement vs being covered as a “Representative”?

When third parties need to be directly obligated by the terms of an NDA, they should sign a joinder agreement. This ensures they are legally bound to the confidentiality provisions. On the other hand, if a third party is acting on behalf of a party already covered by the NDA, they can be classified as a “Representative” without needing to sign. The decision hinges on how much confidentiality and accountability the situation demands.

What NDA terms best prevent advisors from using deal info for AI tools or model training?

To ensure advisors don't use deal information for AI tools or model training, include clear confidentiality clauses that limit data usage strictly to the deal's purpose. It’s also important to add clauses that explicitly forbid disclosing or using the data outside the transaction. These measures reflect best practices for drafting NDAs in M&A, helping protect sensitive information effectively.

How do staged disclosure and clean teams reduce risk without slowing due diligence?

Staged disclosure and clean teams play an important role in reducing risk during M&A due diligence while keeping the process efficient.

Staged disclosure means sharing sensitive information step by step, depending on how far the deal has progressed and how trustworthy the recipients are. This approach limits the exposure of critical data early on, protecting it from unnecessary risks.

Clean teams, on the other hand, consist of individuals working under strict non-disclosure agreements (NDAs). They handle sensitive data separately, ensuring that only approved personnel have access to key information.

When used together, these methods help safeguard confidential data, reduce the chances of leaks, and keep the due diligence process moving smoothly without unnecessary holdups.